Forward look: Top regulatory trends for 2015 in securities

The securities regulatory landscape in 2015 will continue to present significant challenges, with broker-dealers facing new or modified rules and requirements that could significantly affect how they do business. In some regulatory areas, the requirements have been clarified over the past 12 months and firms are now focusing on compliance and refinement. In other areas, the regulations are still emerging or evolving, and firms are looking for clues that can help them prepare.

Here’s a quick look at the key trends securities firms will likely need to focus on in 2015

New reporting requirements for broker-dealers will likely demand significant investments in technology infrastructure and staff however they will create the potential benefit to affected firms by providing the catalyst to produce boarder, cleaner and more cohesive data. The Consolidated Audit Trail (CAT) mandate allows regulators to examine transaction across their entire lifecycle, leading to the development of a system to collect and identify every transaction that involves an exchange-listed security in a US market. The proposed Comprehensive Automated Risk Data Systems (CARDS) Rule would require FINRA member firms to collect, store and report transactional information for retail brokerage accounts.

2. Archiving electronic communications:

Archiving requirements for broker-dealers have resulted in a wide range of challenges that include high storage costs, difficulty conducting searches and discovery within the archives, and difficulty keeping pace with a rapidly evolving communications environment. To tackle these challenges broker-dealers should consider implementing a validation platform that ensures communications are adequately captured and in compliance with regulations to retain all of the required data.

3. Year two of broker-dealer internal control over compliance requirements:

In year two of SEC Rule 17-a5, broker-dealers will likely focus on enhancing compliance programs. It is recommended that broker-dealers develop and implement a strategy for ongoing compliance testing and also review internal controls for efficiency and effectiveness as material weaknesses identified by auditors will need to be fully disclosed to the public.

4. T+2

Although regulation has yet to be formalized, whitepapers by the Depository Trust & Clearing Corporation (DTCC) and Securities Industry and Financial Markets Association (SIFMA) have suggested that shortening the settlement period for securities transactions in the US from three days after the transaction date (T+3) to two days (T+2) would result in operating cost reduction and a more streamlined settlement process. Europe is already in the processes of adopting T+2 as its standard.

5. New liquidity requirements for broker-dealers

Potential liquidity requirements for broker-dealers would require firms to limit the amount of assets they hold and to lock up a significant portion of those assets in the form of unencumbered cash and government securities, potentially resulting in severe impacts to their overall return on equity.

6. SEC scrutiny on dual registrants

Firms that are dually registered as broker-dealers and investment advisers (“dual registrants”) are expected to face further scrutiny from the SEC based on the perception that these organizations pose a unique and significant risk to the marketplace and investing public.